"We need to avoid the risk of a change on 1 January 2021 based on ministry advice and then a year later a different EAF based on advice from the commission," the group says in a submission to the Ministry for the Environment.
"For electricity-intensive firms, small changes in the EAF may far outweigh the impact of phasedown rates."
Critics say the review, announced late November, reflects hasty decision-making as officials try to keep the government's emissions trading scheme reforms on schedule and meet what the ministry describes as an "ambitious but feasible" target to reduce the country's emissions by the equivalent of 13 million tonnes of CO2 during the five years ended 2025.
Included in MEUG's submission is a letter from chair John Harbord to Climate Change Minister James Shaw.
Harbord noted on Nov. 28 that officials had previously believed the EAF should be left unchanged unless "significant events" warranted a reassessment. Not only had there not been any discussion as to whether such events had arisen, but officials had been telling MEUG and others that there were no plans to review the EAF, he said.
The ministry "has been telling interested parties one thing, while planning and preparing to do the exact opposite."
New Zealand's emissions aren't falling fast enough to meet the government's 2050 zero-carbon target. Strong population growth in recent years has boosted consumption, construction and trucking while low rainfall and gas shortages during the past year have increased coal-fired generation.
The take-up of electric cars is also falling below targets set by the previous government, with officials apparently still divided on the merits of a proposed feebate scheme the government had planned to have in place in 2021 to encourage purchases of low-emission vehicles and tax higher-emitting cars and utes.
On the last parliamentary working day in December, the ministry issued a consultation paper on changes to the emissions trading scheme. It said additional annual emission reductions of more than 4 tonnes a year could be achieved by 2025 by building more wind farms and geothermal plants to displace coal- and gas-fired generation, accelerating uptake of new technologies in agriculture and speeding the uptake of renewables in transport and industrial processing.
The emissions trading scheme provides free credits to heavy energy users that are also at risk of losing business to overseas rivals not subject to carbon charges. Those entitlements are estimated at almost 9 million tonnes annually through to 2025.
The ministry noted that, if the EAF is reduced, that would reduce the volume of free credits firms receive and free up more volume for the auctions the government wants to run.
The EAF is currently set at 0.537 tonnes of CO2 per megawatt-hour of electricity used. At a carbon cost of $25, a 0.1 tonne reduction would increase those energy-intensive firms' costs by more than $6 million. New Zealand carbon units have since jumped to $29 after the consultation paper proposed raising the cash fixed-price surrender option to $35 a tonne.
In commissioned advice to the ministry, consultants Energy Link noted that calculating a new EAF "is about as difficult a modelling exercise as one can get" in electricity forecasting.
It recommended moving to three- to five-yearly reviews, but noted that big changes in the market, such as the closure of a major gas-fired power station, or any reduction of load from the Tiwai Point aluminium smelter, should also trigger a review.
In its submission, MEUG notes that there is an argument for waiting until after 2022. By that time the future of the Tiwai smelter – currently under review by Rio Tinto - would be known, as would the future of Contact Energy's ageing 377-megawatt gas-fired power station at Stratford. A decision on whether to invest $80 million extending its life for another five years is due by 2021.
Another approach could be to reset the EAF on a smoothed, rolling historic basis to reflect actual changes in the electricity market while also providing greater predictability for firms and the government.
"A review of the EAF needs to be considered as part of the total package of the changes to the ETS and other climate change policy settings," MEUG said. "It's not simply a matter of when should the EAF be reviewed, it's a question of what should the scope of the EAF review be?"
- BusinessDesk
